Tuesday, August 30, 2016

In The Things Are Getting Better Department

One of the reasons that stocks flatlined for the better part of two years had to do with the so called "earnings recession" that has really put a damper on S&P 500 company's profits.  The market this year is up close to 7% but the majority of that gain has come from what we in the business refer to as "multiple expansion".  That is prices of stocks have moved higher but corporate earnings have not kept pace.  Now here are my two main reasons why I think this has been happening.  The first is that the economy is doing better than most of the investor class thinks.  The other is I think the markets smell a post-presidential deal that likely trades taxation and immigration reform for increased federal spending.  Both of these would, I think, be positive for stocks longer term.

It has been my argument for years now since the evidence started appearing back in 2009 that the worst of the Great Recession was behind us that things have been getting incrementally better.  I've written over 90 articles that have stressed this point since 2009.  Certainly the improvement we've seen since then has been choppy and the gains have been distributed unevenly, but our economy is in much better shape than it was back in 2009.   Now in keeping with my argument, Paula Dwyer over at Bloomberg.com took a look at some of the most recent economic numbers and here were a few she highlighted:

The economy is near full employment and inflation is close to where the Federal Reserve wants it to be.

We learned on Tuesday that new-home sales in July were the highest in almost nine years. 

Gasoline prices averaging about $2.15 a gallon are 20% lower than a year ago.  The Energy Information Agency says pump prices could go below $2.00 in the 4th Quarter.  That will boost consumer confidence and provide a stimulus to the economy just as voters are headed to the polls.


Unemployment is steady at 4.9 percent. The economy this year is adding 186,000 jobs a month on average.

Wages are also rising finally. Average hourly earnings are up 2.6 percent annually and, in some sectors, are increasing at the fastest rate since the recession.

Ms. Dwyer used these points and a few more to illustrate why she thinks any potential Federal Reserve increase in interest rates won't necessarily hurt Mrs. Clinton's chances to become President.  I'm using these to illustrate how much better things are today for a vast majority of Americans than they were a few years ago.  As long as this continues it should at least provide a floor for stock prices in the inevitable event of future volatility.  A foundation like this can also provide the fuel for the next stage of corporate growth.  Maybe that's coming and maybe the market is smelling that out.  If that is the case then the market may be on better footing than many folks currently think.

Link:  "Why the Fed Can't Doom Clinton's Chances."

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time.